Post navigation

Some cautionary advice on the use of Supply Positioning

A recent discussion with procurement consultant, Bill Young, caused us to reflect on the use of ‘supply positioning’ as a model for developing strategies to add value through procurement. We considered the possibility of positioning procurement projects rather than purchase items or supply categories. I concluded that this application had potential but also had practical difficulties. The use of supply positioning by Procurement, without the engagement of other stakeholders, is dangerous. As supply positioning is often misapplied, I thought I might share my thoughts here.

Most procurement professionals will be familiar with a number of 4-quadrant ‘supply positioning’ models. The original and (probably) most widely used is Kraljic’s Purchasing Portfolio matrix (1983), which plots profit potential against supply vulnerability. Subsequent variants have been developed, for example Elliott Shircore & Steele’s Procurement Positioning (1985), and Van Weele’s Purchasing Portfolio (2000).

Supply positioning models convey important concepts but have significant weaknesses in their practical application:

They are intended for purchase items or categories; suppliers and projects may span more than one quadrant (as indeed may categories).

They pose unanswered questions about exactly what will be positioned, at what level of aggregation, and for what organizational unit will the analysis be performed.

The supplier’s side of the supplier/buyer relationship is disregarded. For projects, the sponsor’s (and other stakeholders’) requirements need to be taken into account.

In practice, if you perform a portfolio analysis on individual supply categories you will often identify component groups that map across different quadrants of the grid; then when you look within component groups you may find individual items sit in different quadrants; different mappings are generated with different operating units, and so on. So although supply positioning models are informative in terms of an overview, they do little to connect specific critical issues and opportunities either to broad categories or supplier capability.

Casual use of supply positioning models by Procurement can easily lead to the development of a general category strategy that fails to address critical issues – a possible cause of procurement initiatives failing to deliver to the bottom line. We need therefore to look to other approaches for the identification of critical issues. The perspective of other stakeholders is crucial.

Figure 1

I’ve created a matrix (Figure 1) of intrinsic value (as value is what we are ultimately trying to deliver) v. relative cost, which I use to

perform item/category analysis from an operational perspective – first making a general assessement of the category and then looking for exceptional items or sub-categories.

Both supply positioning and VCA are carried out by cross-functional teams.

‘Intrinsic value’ is a composite measure of opportunity (to be exploited) and risk (to be mitigated) to satisfy customer needs and a firm’s strategic initiatives to secure competitive advantage. The composite measure allows a simple 2-dimensional grid and a matrix that reflects the trade-off between cost and value.

Intrinsic value is a concept that can be applied to projects; the more problematic axis is “cost”. The model (as shown) does not make sense if we use project execution cost. We might be interested in the impact a procurement project might have across the purchases portfolio, in which case “cost” is the relative cost of the affected items/categories.

When considering the value to be gained from procurement projects, Bill Young suggested that we might identify the relevant project drivers:

input drivers – cost/price

output drivers – utility (what the customer is prepared to pay)

strategic drivers – for example, proprietary innovations to gain competitive advantage or access to new markets.

The purpose of this is to disaggregate the benefits in order to see each clearly.

Bill’s approach is consistent with VCA guru Michael Porter’s sources of competitive advantage (cost advantage and differentiation) and definition of value (“the amount that buyers are willing to pay for”) and my own. The separation of ‘utility’ and ‘strategic’ drivers may help to stimulate cross-functional debate, although strategic initiatives are aimed, ultimately, at either reducing cost or improving value to the customer (or a complex combination of the two, often with a view to future customers and markets).

The cross-functional debate, and the identification of opportunities, risks, costs and benefits, is more important than accurately positioning a project, item or category on a grid. Supply positioning is not a tool to be used unilaterally by Procurement. The positioning of a category comprising ostensibly similar items and creation of a one-size-fits-all strategy is inherently dangerous. Generic category strategies derived this way are likely to have unforeseen consequential costs or damage to the business. In terms of the entity to map, the most important attribute is its homogeneity. Robust analysis by a suitably informed team is necessary to identify anomalies and exceptions.

Executive Interim Managers & Consultants

Procurement & Supply Chain Services:

Helping and leading businesses, and providing the expertise, to improve the performance of procurement and supply chains, to engage stakeholders, to meet more efficiently and effectively the needs of the business and its customers.

Follow Acuity (Consultants) Ltd

EU Cookie Law

An EU e-Privacy Directive was adopted by all EU countries on May 26th 2011. At the same time the UK updated its Privacy and Electronic Communications Regulations, which brought the EU Directive into UK law. The Regulations provide that certain information must be given to a website's visitors and the user must give his or her consent to the placing of cookies.

Like most websites we use cookies to make this site as useful as possible. Cookies are small text files we put in your browser to track usage of our site.
The law allows us to place cookies on your machine if they are essential to the operation of this site; for all others we need your permission to do so. This website does use some non-essential cookies.

YOUR PRIVACY IS IMPORTANT TO US. We do not use cookies to track individual users or to identify them, but to gain useful knowledge about how the site is used so that we can keep improving it for our users. Some third party cookies are set by services that appear on our pages but are outside our control. For example, when clicking on the relevant service operator's icon, cookies may be placed by Twitter, Facebook and inShare to enable visitors to share content on this site.

The cookie settings on this website are set to "allow cookies" to give you the best browsing experience possible. If you continue to use this website without changing your cookie settings or you click "Accept" then you are consenting to this.

More information about cookies, including how to block them or delete them, can be found at AboutCookies.org.